HNIs bail out realtors, but for high returns

BANGALORE/NEW DELHI: Some ultra-rich Indians have found a new way to bypass the economic slowdown and make mega returns on their investment. According to analysts and industry players, real-estate developers across the country are being bailed out by high net worth individuals (HNIs) by offering short-term loans to meet developers' funding requirements to finish ongoing projects.

With interest rates of 25% and more, these loans are expensive for property developers , but they have little choice in a market where demand for apartments and commercial space is at the bottom and new funds are hard to come by. For those HNIs who are ready to take on the risk of investing in real-estate projects, the returns are higher than what they could get from other sources.

"HNIs want to invest directly with developers which are giving attractive returns compared to private equity funds," said Rajeev Bairathi, executive director of capital transaction group and north India at real-estate consultant Knight Frank India. "They are asking for double the collateral, and developers are willing to pick them up at least for six months to over a year."

HNIs are willing to invest anywhere between Rs 50 crore and Rs 200 crore in real-estate projects, he said. Property sales in India are down as consumers are wary of spending because of slowing income growth, sticky inflation and high borrowing costs. Banks' reluctance to fund high-risk businesses like real estate and the absence of equity funding have also added to the woes of the builder community.

According to Jones Lang LaSalle India, cost of construction has increased 25-30 % over the past four years in top cities, compared with a 20% rise in pan-India capital values. "There is a huge pickup in HNIs giving loans to builders. They are willing to invest in real estate as this provides them on-the-ground security with a reasonable degree of certainty," said Ambar Maheshwari, managing director of corporate finance at Jones Lang LaSalle. But developers are now asking for longer-term loans, said a Delhi-based HNI who is also an exporter.

"They are asking for at least one-year-long loans. As the interest rate is so high, and the tenure is longer, the recoverable amount at the end of the year is also high, so we are today asking for higher collateral," which he said could be up to double the value of the recoverable amount. This person said he lends to real-estate firms as part of a group that includes nine other HNIs who have interests in businesses ranging from hospitality and exports to automobiles.

This group of HNIs has provided bridge loans to five-six developers in the National Capital Territory of Delhi in the past six months and there are many other HNIs who lend to developers. "The money we lend is surplus capital from businesses that is not being plowed back as the economy is slow," this person said, adding that the strategy could backfire if the general elections could not bring in political stability and property prices fall further.

A midsize Hyderabad-based builder, who did not want to be named, said the market was much stretched and raising even Rs 20 crore to Rs 50 crore had become very difficult. "Banks are very stringent in lending money to builders and this is when HNIs' money comes easy even though the interest rate is much higher," he said. A Bangalore-based HNI, who works at a multinational consultancy firm, said he had seen huge demand among the builder community for bridge loans.

"There are very few cash-rich developers as the realestate market has slowed down and builders need money to get projects moving. However, I am extremely choosy on my investment now," he said. According to the third edition of the 'Top of the Pyramid' report from Kotak Wealth Management and CRISIL Research , the number of ultra-rich households in India in 2012-13 is estimated at around 100,900, which is expected to triple to around 329,000 over the next five years. The net worth of them is estimated to surge four-and-a-half times from now to Rs 380 trillion by 2017-18.

HNIs are people with investible assets of at least $1 million (about. 6.18 crore). According to CRISIL's Income and Demographics Analysis, ultra high net worth households are those with a minimum average net worth of. 25 crore, essentially accumulated over 10 years.

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